Bargaining and inequity aversion: On the efficiency of the double auction

In a bargaining setting with asymmetrically informed, inequity-averse parties, a fully efficient mechanism (i.e., the double auction) exists if and only if compassion is strong. Less compassionate parties do not trade in the double auction in the limit of strong envy.

► We analyze bargaining with incomplete information and inequity-averse parties. ► A fully efficient mechanism exists if and only if compassion is strong. ► The double auction is a fully efficient mechanism if compassion is strong. ► If envy is very strong (and compassion is weak), trade breaks down completely. ► We numerically analyze the double-auction environment with intermediate values.